Deck 5: Risk Analysis

Question 1

Bankruptcy prediction research has identified three broad factors influencing long-term solvency risk,which of the following is not one of the factors?

A) Investment factors
B) Financing factors
C) Operating factors
D) Credit factors

Answer 1

D

Question 2

The best indicator for assessing a firm's long-term solvency risk is its ability to generate what over a period of years?

A) Sales
B) Earnings
C) Positive cash flows
D) Income from continuing operations

Answer 2

B

Question 3

Doran Corp.has a current ratio of6.Under which of the following scenarios might this indicate a problem?

A) inventories are increasing due to the introduction of a new product
B) the company is holding cash in expectation of making a large investment in equipment
C) receivables are increasing due to increasing sales
D) inventories are increasing and the industry in which Doran Corp. operates is experiencing a recession

Answer 3

D

Question 4

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:



Refer to the information for Mobile Company.Mobile's quick ratio changed by what percentage from 2009 to 2010?

A) 30%
B) 107%
C) 25%
D) 82%

Question 5

Market equity beta measures the covariability of a firm's returns with the return's of

A) all industry competitors in the market.
B) risk free securities.
C) all securities in the market.
D) all firms of comparable market value.

Question 6

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:



Refer to the information for Mobile Company.Days of other financing required by Mobile at the end of 2010 would be

A) 54.36 days
B) 75.36 days
C) 102.94 days
D) 5.27 days

Question 7

Which of the following states of financial distress would be considered the most troubling for an investor or creditor?

A) failing to make a required interest payment on time
B) paying an accounts payable after the billing date
C) restructuring debt
D) defaulting on a principal payment on debt

Question 8

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:



Refer to the information for Mobile Company.Mobile's days receivables outstanding at the end of 2010 was

A) 43.20 days
B) 40.50 days
C) 45.25 days
D) 8.50 days

Question 9

Which of the following is not one of the three explanatory variables that determines a firm's market beta?

A) Degree of investing leverage.
B) Degree of operating leverage.
C) Degree of financial leverage.
D) Variability of sales.

Question 10

The Johnson company has a current ratio of 1.45.The company has just sold $600,000 worth of merchandise on credit.What will the current ratio be after the sales on credit?

A) greater than 1.45
B) 1.45
C) less than 1.45
D) unable to determine without more information

Question 11

Here are several ratios calculated from Midas Company's financial statements: Days in Receivables = 45
Days in Payables = 36
Days in Inventory = 30
How many days of working capital financing does Midas need to obtain from other sources?

A) 39 days
B) 36 days
C) 56 days
D) 26 days

Question 12

One common problem with the current ratio is that it is susceptible to "window dressing." If prior to the end of the accounting period Saxon Company has a current ratio of 1.5 and management wishes to boost its current ratio it may decide to

A) pay off accounts payable prior to year end.
B) purchase more inventory on account.
C) purchase short-term investments with cash.
D) purchase more inventory with cash.

Question 13

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:



Refer to the information for Mobile Company.Mobile's Operating Cash Flow to Current Liabilities ratio in 2010 was

A) .70
B) 1.39
C) 1.00
D) .72

Question 14

Which of the following ratios is not a measure of long-term solvency risk?

A) Debt /Equity Ratio
B) Interest Coverage Ratio
C) Operating Cash Flows to Current Liabilities Ratio
D) Liabilities to Assets Ratio

Question 15

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:



Refer to the information for Mobile Company.Mobile's current ratio in 2010 was

A) 1.07
B) 1.45
C) 1
D) .69

Question 16

Univariate bankruptcy prediction models help identify factors related to bankruptcy,but they do not provide information about

A) specific ratios that are important.
B) the amount of Type I and Type II errors.
C) which specific company will go bankrupt.
D) the relative importance of individual financial statement ratios.

Question 17

Economic theory teaches that differences in market returns must relate to differences in

A) book value
B) perceived risk
C) price-earnings ratio
D) bankruptcy risk

Question 18

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:



Refer to the information for Mobile Company.Mobile's days accounts payable outstanding at the end of 2010 is

A) 7.53 days
B) 48.09 days
C) 45.51 days
D) 50 days

Question 19

Mobile Company
Mobile Company manufactures computer technology devices. Selected financial data for Mobile is presented below, use the information to answer the following questions:



Refer to the information for Mobile Company.Mobile's 2010 Inventory Turnover ratio is

A) 7.46
B) 11.83
C) 6.16
D) 5.62

Question 20

If a customer wanted to obtain bank financing which of the following will the bank inquire about before granting a loan?

A) Firms credit history
B) financial position of the firms creditors
C) firms cash flow
D) a and c

Question 21

Below is selected information from Marker's 2012 financial statements:

Marker's 2012 Interest Coverage ratio is

A) 7.66
B) 1.00
C) 11.35
D) 4.35

Question 22

All of the following are common international risks faced by companies except:

A) asset expropriation
B) exchange rate changes
C) political unrest
D) dependence on one or a few suppliers

Question 23

Below is selected information from Marker's 2012 financial statements:

Marker's Liabilities to Assets Ratio for 2012 is

A) 105.1%
B) 63.1%
C) 78.3%
D) 100.0%

Question 24

Below are various states of financial distress:
1)defaulting on a principal payment on debt
2)restructuring debt
3)liquidating a firm
4)filing for bankruptcy
5)failing to make a required interest payment on time

A) 5, 1, 2, 3, 4
B) 5, 2, 1, 4, 3
C) 1, 5, 2, 4, 3
D) 1, 5, 2, 3, 4

Question 25

Changes in interest rates can typically affect firms in all of the following ways except:

A) The value of investments in bonds or other investment securities with fixed interest
Rates.
B) The value of liabilities with fixed interest rates.
C) The returns a firm generates from pension fund investments.
D) The cash-equivalent value of assets invested abroad.

Question 26

Below is selected information from Marker's 2012 financial statements:

Marker's 2012 Long-term Debt to Long-Term Capital ratio is

A) 31.4%
B) 29.4%
C) 34.0%
D) 25.4%

Question 27

All of the following are common industry risks faced by companies except:

A) litigation
B) technology
C) regulation
D) competition

Question 28

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in financing? Ability to generate cash Need to use cash

A) Profitability of goods and services sold Working capital requirements
B) Sales of existing plant assets Plant capacity requirements
C) Borrowing capacity Debt service requirements
D) Profitability of goods and services sold Debt service requirements

Question 29

Long-term ______________________________ represents the longer-term ability of the firm to generate cash internally or from external sources to satisfy plant capacity and debt repayment needs.

Question 30

All of the following typically drive firm-specific risks except:

A) the nature of the business
B) competition
C) supplier relationships
D) demographic shifts

Question 31

All of the following are common domestic risks faced by companies except:

A) recessions
B) technology
C) inflation
D) demographic shifts

Question 32

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in investing? Ability to generate cash Need to use cash

A) Profitability of goods and services sold Working capital requirements
B) Sales of existing plant assets Plant capacity requirements
C) Borrowing capacity Debt service requirements
D) Profitability of goods and services sold Debt service requirements

Question 33

The source of risk related to political unrest and exchange rate changes are _________________________.

Question 34

Which of the following can companies use as collateral for a loan?

A) prepaid insurance
B) prepaid rent
C) property, plant, and equipment
D) retained earnings

Question 35

Short-term ____________________________ represents a firm's near-term ability to generate cash to service working capital needs and debt service requirements.

Question 36

Below is selected information from Marker's 2012 financial statements:

Marker's 2012 Liabilities to Shareholders' Equity ratio is

A) 100.0%
B) 170.9%
C) 63.1%
D) 129.3%

Question 37

Below is selected information from Marker's 2012 financial statements:

Marker's 2012 Long-term Debt to Shareholders' Equity ratio is

A) 31.4%
B) 29.4%
C) 34.0%
D) 45.8%

Question 38

Changes in foreign exchange rates can affect a firm in all of the following ways except:

A) The prices a firm pays to acquire raw materials from suppliers abroad.
B) The amount of cash a firm receives when it collects an account receivable, a loan
Receivable, or another receivable denominated in a currency other than its own.
C) The value of domestic liabilities with fixed interest rates.
D) The prices a firm charges for products sold to customers abroad.

Question 39

Which of the following properly links the factors affecting a firm's ability to generate cash with its need to use cash in operations? Ability to generate cash Need to use cash

A) Profitability of goods and services sold Working capital requirements
B) Sales of existing plant assets Plant capacity requirements
C) Borrowing capacity Debt service requirements
D) Profitability of goods and services sold Debt service requirements

Question 40

The quick acid test ratio contains all of the following except:

A) cash
B) accounts receivable
C) marketable securities
D) prepaid assets

Question 41

The current ratio is one of the measures of__________ of the firm.

Question 42

One problem with debt ratios is that they provide no information about the ability of the firm to generate ________________________________________ to service debt.

Question 43

Large current ratios indicate the availability of cash and near cash assets to repay ____________________ coming due within the next year.

Question 44

In bankruptcy prediction analysis a type ____________________ error is classifying a firm as nonbankrupt when it ultimately goes bankrupt.

Question 45

The analysis of short-term liquidity risk requires an understanding of the _________________________ of a firm.

Question 46

The source of risk related interest rate changes and demographic changes is ____________________.

Question 47

Common shareholders benefit with increasing proportions of debt in the capital structure as long as the firm maintains an excess of ____________________ over the after-tax cost of debt

Question 48

In general,the shorter the number of days of needed financing,the ____________________ is the cash flow from operations to average current liabilities.

Question 49

The beta coefficient measures the ____________________ of a firm's returns with those of all shares traded in the market (in excess of the risk-free interest rate).

Question 50

In bankruptcy prediction analysis a type ____________________ error is classifying a firm as bankrupt and it ultimately survives.

Question 51

The operating cycle must not only generate cash to supply ________________________________________ needs,it must generate sufficient cash to service debt.

Question 52

When calculating the quick ratio,an analyst would include in the numerator cash,________________________________________,and receivables.

Question 53

Cash flow from operations indicates the amount of cash that the firm derived from operations after funding ______________________________.

Question 54

An analyst can view the revenues to cash ratio as a ________________________________________.

Question 55

By adding the number of days that inventory is held to the number of days that accounts receivable is outstanding an analyst can calculate the number of days of _____________________________________________ the firm requires.

Question 56

_________________________ concerns a firm's ability to make interest and principal payments on borrowings as they become due.

Question 57

When management takes deliberate steps at a balance sheet date to produce a better current ratio than is normal it is called ______________________________.

Question 58

The source of risk related to management competence,strategic direction and lawsuits is _________________________.

Question 59

The source of risk related to technology,regulation and availability of raw materials is ____________________.

Question 60

Financially healthy firms frequently close any cash flow gaps in their operating cycles with ________________________________________.

Question 61

The ________________________________________ ratio indicates the number of times that net income before interest expense and income taxes exceeds interest expense.

Question 62

The current risk-free rate of return in the economy is 6%.In addition,the market rate of return is currently 8.5%
A.Given this information,what would be the expected return on common stock for a company with a systemic risk level (Beta)of 1.3? Show your calculations.
B.Describe systemic risk.

Question 63

Refer to the financial statement data for Patriot Corp.for 2011 and 2010.Complete the table by computing the ratios.


Financial Ratio to be calculated:

Question 64

When a company wants to calculate the current ratio the would divide the current assets by the ___________

Question 65

What is the effect of the declaration of diviends have on the liquidity of a corporation?

Question 66

In the empirical research on earnings manipulation discussed in the chapter a number of firm characteristics are found to be associated with the likelihood of engaging in earnings manipulation.For each of the characteristics listed below,discuss the rationale for their inclusion in the model:
a.Gross Margin Index
b.Asset Quality Index
c.Sales Growth Index
d.Depreciation Index
e.Leverage Index

Question 67

When the excess of ROA over the after-tax cost of borrowing declines,additional ________________________________________ begins to reduce the return to common shareholders.

Question 68

Falcon Corporation has current assets of $400,000 and current liabilities of $275,000.
Required:
Compute the effect of each of the following transactions on Falcon's current ratio:Compute the effect of each of the following transactions on Falcon's current ratio:
a.Refinanced a $60,000 long-term mortgage with a short-term note.
b.Purchasing $108,000 of merchandise inventory with short-term accounts payable.
c.Paying $50,000 of short-term accounts payable.
d.Collecting $90,000 of short-term accounts receivable.

Question 69

Hammer Corporation wrote off $185,000 of obsolete inventory at December 31,2011.
Required:
What effect did this write-off have on the company's 2011 current and quick ratios?

Question 70

Given the following information,calculate for Year 2 the number of days of working capital financing the firm will need to obtain from other sources?

Question 71

For each of the following scenarios,determine if it is an indicator of potential cash flow problems:

Question 72

The main ratio used by many financial analysts to examine a company's short-term liquidity risk is the current ratio.However,there are a number of problems that arise when this ratio is used to examine short-term liquidity risk that may make the current ratio less useful than initially thought.Discuss the interpretative problems of using the current ratio.

Question 73

A.What are the three measures that are used to analyze long term solvency risk?
B- describe each measure briefly

Question 74

One criticism of the interest and fixed charges coverage ratios as measures of long-term solvency risk is that they use earnings rather than cash flows in the numerator.Detail how the interest coverage ratio and fixed charges coverage ratio are calculated.In addition,discuss why using earnings in the numerator is a problem and what method could be used to alleviate this problem.

Question 75

When a financial analyst examines the credit risk of a company,it is common that he or she uses a set of factors that all begin with the letter "C." Each factor provides a consideration that enters into the lending decision.List and discuss how each of the factors affects a company's credit risk.

Question 76

Bankruptcy analysis research has gone through many iterations,from univariate bankruptcy prediction models to sophisticated logit models.However,after examining the results of the research there appear to be a number of common factors that consistently explain bankruptcy.These factors can be grouped into investment factors,financing factors,operating factors.For each of the three groups discuss specific factors that have been found to significantly explain bankruptcy.

Question 77

Below is information from Darren Company's 2012 financial statements.

Using this information calculate the following ratios:

Question 78

Working capital is defined as ______________________ minus _____________________.

Question 79

Discuss the differences between Chapter 7 and Chapter 11 bankruptcy filings?

Question 80

For each of the following factors,determine if the given change or level of that factor would lead an analyst to believe that managers of a firm are more or less likely to engage in earnings manipulation: